Residential Income Properties vs. Other Real Estate Investments

Photo Credit: AschafOne of the most valuable commodities we possess is time.  Each one of us has the same 24 hours available every day and we all want to minimize the amount of time spent behind a desk.  Don’t we all hunger for more time to spend with our families and friends, living life abundantly and fully?  Multi-unit Residential Income Properties are the key to this kind of lifestyle.

Think of it this way. When buying, for example, a ten-unit Residential Income Property, an investor is in fact putting together a group of ten tenants who are willing to pay the mortgage on the building as well as the maintenance, insurance, repair costs and property taxes. In fact, they are paying you so much money that after all expenses are paid there is money left over for the investor to do with it as he or she wishes. This group of ten people is literally in charge of making the investor wealthy. They enable him to spend more time with his family and friends in the process.

When looking at the differences between investing in multi-unit Residential Income Properties and Single-Family Residences (SFR) or condominiums, we find that advantages such as cost, time, overall effort, savings, and reduced stress favor investing in Residential Income Properties in many ways. Then, consider the exponential benefits of buying a group of units in a single transaction versus buying several units in multiple transactions. When buying an apartment building, the cost-per-unit is lower.  The greater the number of units in the building, the larger the cash flow, and most likely, the larger the profit will be when the building sells.

When all is said and done, the economy has little effect on an investment in Residential Income Property. Regardless of what is happening on Wall Street or in the overall business environment, people need a shelter. In good times or in bad times, in summer or in winter, in war or in peace, before they spend money on a new computer, vacation or a new car, they will first make sure they have the resources to pay their rent. Wouldn’t anyone do the same? Therefore, as a landlord, the investor will collect rents each month regardless of the economy being up or down, or being good or bad. The landlord’s income is not going to change significantly, one way or the other. The mortgage payment is not going to change one way or the other. The expenses are not going to change significantly, up or down. All the while, the landlord continues building an equity position in the property, using other people’s rent money. These rents are paying the mortgage, insurance and upkeep of the property. Cash flow continues each month regardless of the state of the economy. At the end of the day for the investor, everything remains just the same.

One wonders:  When will all this end?  When will real estate stop appreciating in value year after year, decade after decade?

The answer is simple – theoretically, NEVER!  Why?  Because so long as the population is expanding, and so long as people continue to move into our neighborhoods, the demand will always be there. As stated earlier, once we are done feeding ourselves, we need a place to live. It’s silly to think that the day will come in which people no longer need shelter. It’s equally silly to think that for some reason the population will stop expanding one day, or that we will have a shorter lifespan than we have now, or that the birth rate will plummet abruptly to decrease the potential future demand in housing or in shelter. It’s also absurd to think that anyone can manufacture more land.

This is why the real estate downtrend is not sustainable. This is why it’s smart to take the time to learn how to invest for the future, now. One should lay a new foundation for growth as soon as possible, without delay. Smart investors among us are imagining and planning their future now by applying all their knowledge into investing activities today, not tomorrow. After all, applied knowledge becomes power. Use of this power now is wise because one day, sooner rather than later, each of us will want to be worry- free with a sense of financial independence and security.

There’s a reason why some of the world’s richest people in America have made their fortune in real estate.  And, they made it by investing in commercial real estate, not in residential real estate. What one person can do, another can do.

With this in mind, investments in Residential Income Properties should be made with the clear understanding that it is not about “flipping” properties every other month or an immediate appreciation in value of the property you own, but rather the property’s potential for a positive cash-flow. It is just like a real business with a balance sheet, P&L and a cash flow that it must produce to survive, to be valuable and grow. Positive cash flow happens only when a property produces more income in rents than the owner’s costs to maintain and service the property. Therefore, for any given property that provides a positive cash flow, a decline in real estate prices of single family residences, condominiums or the market in general should be of little concern. While the market is taking a beating, a positive cash flow property is still producing an income (passive residual income). It will continue to do so every passing month until one day the market starts coming back – at which point the owner can put his property on the market and sell with further profit if he chooses. The downtrend never affects the investor. While everyone else was concerned about the housing market, the investor was generating an income and building an even higher equity position in his respective investment property.

The benefits of multi-unit Residential Income Properties over other types of real estate such as SFR and condominiums are countless.  Consider these differences when comparing buying one ten-unit building, with ten SFR or ten condominiums:

  1. Only a single transaction – with one escrow, one inspection, one open house and one loan – is necessary to acquire a Residential Income Property.  To accomplish the same result with SFR or condos, one would visit at least ten open houses (at least), open ten escrows, conduct ten different inspections, and complete ten different loan applications (on selling, this whole process repeats ten more times).
  2. Only one mortgage payment to manage, one interest expense to incur, one set of maintenance and utilities expenses and one appreciation schedule instead of ten.
  3. Only one roof to replace or to repair, one lawn to maintain and one place to collect rents as opposed to ten properties in ten different locations.
  4. Far less competition in finding a property to buy or to sell.
  5. All units in the building get sold in one transaction as opposed to marketing, advertising or holding open houses for each property individually.
  6. Far easier to track the income and expenses of one building with ten units than ten 10 different properties in ten different locations.
  7. Far easier to manage the tax implications of one building with ten units and one tax ID number than with ten separate properties in ten locations with ten tax ID numbers.
  8. An exterior improvement increases the value of each unit in a multi-unit property while improvements to a single residence are on a per-house basis.
  9. In a ten-unit building, a single vacancy represents 10% of the building’s income, while a SFR or condo vacancy is a 100% vacancy rate with subsequent income loss.
  10. The sale of a single ten-unit Residential Income Property requires one transaction expense for commissions, advertising, closing costs, third-party reports, inspection fees, escrow fees, title fees and other related expenses, while selling ten different properties requires multiple transactions over a long period of time. For example, if an average escrow is 45 days, it may take as long as 450 days or fifteen months to sell all ten properties.

Photo Credit: Aschaf

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